The end of bitcoin

The bitcoin boom may be over. And the death of the cryptocurrency craze may well come at the hands of government regulators.

Earlier this week, Bloomberg reported that Chinese authorities plan to block domestic access to central cryptocurrency trading platforms and related services. Subsequent stories suggested officials in Russia and South Korea might pull similar moves.

In response, the price of a single bitcoin — the world's premiere digital currency — has plummeted. Over the weekend, bitcoins were valued at nearly $14,500. That price tag plunged below $9,500 on Wednesday, before bouncing back Thursday — though still only to $12,000. Worse still, bitcoin has been on a slow slide since December, when it topped out at almost $20,000 per coin.

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Is the bubble really bursting? Only time will tell. But if China and other governments really do crack down on cryptocurrencies, it's hard to see much of a future for bitcoin.

China's government actually already banned official cryptocurrency exchanges late last year. What's new is a potential crackdown on unofficial homegrown trading and offshore trading as well. Similar reports of a coming reckoning surfaced from state-run Chinese media as well. Reuters even reported on a meeting of Chinese financial and regulatory authorities, where one central banker argued that all centralized trading of digital currencies by individuals and businesses should be banned.

On Tuesday, Russian President Vladimir Putin said that "legislative regulation [of cryptocurrencies] will be definitely required in [the] future." And on Thursday, South Korean officials said they were considering following China's lead, and shutting down crypotcurrency trading via exchanges.

Some of the resulting selloff was clearly a news-induced panic. But the news also landed right in the middle of what is pretty obviously a massive bitcoin bubble. The digital currency rocketed from around $900 in December 2016 to almost $20,000 in December 2017. Then it fell around 40 percent in a month.

Something like 15 percent of all bitcoin trading reportedly occurs in South Korea. Meanwhile, around 58 percent of all bitcoin mining occurs in China. Snuffing out trading in either country, but in China especially (never mind both), could be devastating to the bitcoin market and its investors.

All of this ultimately points back to a question that has never really been answered well: What the hell is bitcoin for?

To really work as money, bitcoin needs to be widely used. There need to be lots of actors providing a wide array of goods and services who are all willing to take bitcoin as payment.

But why would anyone use it? Contrary to the libertarian romanticism that inspired bitcoin's creation, most Western fiat currencies work really well as money. There's no need for most businesses to saddle themselves with bitcoin's extra headaches. It doesn't offer the speed or convenience of standard mainstream payments systems like credit cards or PayPal. And bitcoin's volatility and the extreme run-up in its price have made transaction fees highly volatile and expensive.

To find a devoted economy, bitcoin needs to stabilize in value. To stabilize in value, bitcoin needs a devoted economy. It's a bit of a catch-22.

The final use of bitcoin and other cryptocurrencies, of course, is to evade government oversight and dodge law enforcement. Which brings us back to China, Russia, South Korea, and their possible crackdowns.

There are plenty of governments in the world that deserve to be evaded. But they generally do not like being evaded. Especially more authoritarian ones like China or Russia. Not only can they kill trading of a cryptocurrency within their borders, they can use their power over other payment systems — the legal and mainstream ones — to cut off all the access points where a cryptocurrency is converted into any other currency.

If that happened, bitcoin could (maybe) still survive in the shadows. But only if it fixed all the problems that prevent it from functioning as money. That would require a cryptocurrency based on design philosophies unlike any we've seen so far.

As a boutique investment asset, bitcoin can really only survive as long as governments tolerate its presence. If governments cut them off, bitcoin and its fellow digital currencies have no other home to retreat to.

No wonder bitcoin investors are having a panic attack.